Tight Butter Supply and Falling Price: Why?

Published on: 13:09PM Nov 29, 2010

Why is price declining when inventory is 43% less than a year ago and exports are running consistently and significantly higher than last year? Much of it comes down to whether buyers feel comfortable with the current supply.

End-of-the-year demands can have strange effects on the dairy markets. It is a time when demand is higher while at the same time manufacturers tend to limit inventory before going into the seasonal lull as the calendar rolls over into the New Year.
Milk production and components increase as the fall and winter months progress. This increases cheese yield and the availability of milk for manufacturing and bottling. Fluid milk demand for schools results in more cream availability for production of various products. This comes at a good time as more demand requires more product availability. Any change in this balance creates some interesting volatility in these markets.
The window is closing for orders to be filled for the Christmas period, with most demand being confined to fill-in buying to meet retail orders. Declining prices at this time may spur additional demand. Cheese prices falling to $1.40 brought more buyers to the market looking to take advantage of lower prices. Cheese prices then rebounded as buyers became more aggressive. However, the price rebound may have run out of steam for the time being.
Butter has really been the star of the show for much of the year. Prices increased an impressive 92 1/2 cents from Feb. 2 through Sept. 27. Supply was dwindling from lower production and good demand. Butter price is generally considered the leader of cheese prices, but cheese struggled for a while before being able to make a sustained move higher. However, all good things must come to an end, and cheese prices began declining two weeks before butter. Once butter price began to weaken, it was Katie-bar-the-door with prices falling dramatically.
Butter futures prices anticipated a drop in cash price as the December and later contracts were holding a steep discount to cash. The December contract traded in the $1.60 range for much of the year, despite continued increases in the cash price. Seasonality kept this contract from following cash higher. Eventually December futures were able to increase to the $1.80 range as cash moved to, and above, $2.00 until nearly the middle of November. The decline of 70 cents on the spot market has moved the December contract lower to remain in line and converge with cash.
Why is price declining when current inventory is 43% less than a year ago? Why is price declining when exports are running consistently and significantly higher than last year?
July butter exports were up an incredible 1,052.8%, August exports were up 675.2%, and September exports increased 89% over a year earlier.
Much of it comes down to whether buyers feel comfortable with current supply. Orders are being filled for the Christmas season while at the same time churning has been more active. More cream is available and holiday demand will come to an end. Buyers know this.
Sellers are anxious to keep on-hand inventory low and want to move any extra supply to the market as quickly as possible. This causes buyers to stand back waiting for lower prices.
So, a tighter inventory does not mean much once the current supply is expected to be sufficient to meet demand. We all look at this the same way. If our supply of corn is expected to last, we will not purchase any more. If our hay supply is tight, but expected to last, we will not be as aggressive to purchase more. It is this psychology that has turned the market.
Upcoming reports:
-          Agricultural Prices report on November 30
-          Fonterra auction on December 1
-          California 4a/4b prices
-          Dairy Products report on December 2
-          November federal order class prices on December 3
-          World Agricultural Supply and Demand report on December 10
-          Export statistics on December 10
-          Fluid milk sales
-          California Class I price on December 10
Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their website at www.agdairy.com.
The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and my not be suitable for everyone. Those acting on this information are responsible for their own actions.